Are people actually saving more since the global financial crisis?

Jeannette asks: Are people actually saving more since the global financial crisis? And if so, what are the percentages?

Ian answers: Jeannette, the short answer is “yes”, it looks like people are saving more since the crisis. The numbers and the thinking that go along with increasing savings in this environment are interesting, let’s go for a slightly longer version of the answer.

Numbers up
Figures from the Organisation for Economic Co-operation and Development (OECD) on household saving ratios help paint the picture as they present official estimates of the amount of money put into savings each year, expressed as a percentage of income. I looked at 26 developed countries, of which 16 increased their saving ratio between 2007 and 2012. This is how we can say there is a general tendency to save more since the start global financial crisis.
Some of the changes have been dramatic. Ireland recorded the largest rise, moving from -0.1% of income in 2007 to 8.3% in 2012 – a change of 8.4 percentage points. Norway’s rose 8.1 percentage points, New Zealand’s by 5.3 and Australia’s by 5.1. At the other end of the scale are Italy, falling 4.6 percentage points (the largest decline of the 26 countries) and Austria, falling 4.2.
But since you asked an economist, the answer is not going to be as simple as that.

Paying debt is saving too
When most people talk about saving, they usually mean putting money into a bank account. So, to most people, if people were saving more, bank balances would increase.
When economists talk about saving, they mean the difference between income and spending. Under this definition, a decision to pay off debt is a form of saving.
There is some evidence that paying down debts is happening in significant numbers post-crisis – with some in the United States, for example, reducing the amount owed on credit cards. In the United Kingdom, there is evidence some homeowners have used the low interest rates to pay more on their mortgage than is required, reducing debt that way.
Also, if lending is tighter and it is harder to get loans, an effect can be, in a strange way, to increase saving.
Paying more into pension funds also increases saving.

Why do we do it?
So we know saving is popular right now – but an interesting question is why.
Confidence could be part of it. Are people confident they will have their job next year? If not, it makes sense to save now (whether that is paying debt or putting money in an emergency fund in the bank) to prepare for the uncertain future.
With interest rates very low, it may seem strange – irrational even - for people in secure jobs to overpay their mortgage. After all, those with lower monthly repayments could effectively have a holiday from their mortgage and spend the extra on a real holiday (or the fancy pair of shoes they have been hankering for over the past few years). But their actions may not be irrational. Overpaying the mortgage will likely mean being mortgage-free early. For these people, paying off “cheap” debt quickly can be a very sensible option.

A sting in the tail
Saving more makes may sense at the individual level but there is a sting in the tail known as the paradox of thrift.
The paradox is because cutting spending on a massive scale can have unintended consequences and hurt the wider economy. Saving (or being thrifty) by any individual is potentially good for their finances but when many people do the same thing at the same time, the effect can lower economic growth and be bad for the finances of the economy in general.
Certainly, it worries governments and central banks and can limit the effectiveness of monetary policy . The paradox of thrift was described by British politician Vince Cable in 2011 as “people being individually wise but collectively foolish”.

The economist joke
Jeannette, it is sometimes said that if you ask two economists the same question you will get more than two replies – and each would contradict the other. It’s a cruel joke, but it has a point. But before you just laugh and walk away, take a moment to see what we can learn from it.

Not all debt is bad
Reading some personal finance literature, you would think debt is bad. The old saying “never a borrower or lender be” implies just that. But that is nonsense. If nobody borrowed, there would be no point in saving. After all, who would lend your savings to? The hidden gem from the way the economist looks at saving is that it implies there are times that it can be appropriate to take up debt and times when it appropriate to pay it back. And after all, isn’t that what good financial advice suggests as well?